Dollar steady as America declines

February 10th, 2014

So wrote Gillian Tett in Friday’s Financial Times.

Mr. Tett started his piece by noting that Nigeria’s central bank had announced that it would convert almost a 10th of Nigeria’s $43 billion reserves from dollars to renminbi. Tett went on to acknowledge that only 0.01 percent of the world’s central bank reserves are now held in renminbi, compared with 60 percent in dollars and 25 percent in euros.

However, forecasts for the renminbi are bright. Patrick Zweifel, chief economist at Pictet Asset Management, believes that China’s fiat currency could reach 30 percent of central bank holdings by 2025. Tett also noted “irritations about America,” such as its current account deficit, rising government debt, the hangover from the 2008 Global Financial Crisis, and political gridlock that portend a “looming dollar decline.”

Indeed, if world central bank holdings of renminbi reaches 30 percent and the euro holds at 25 percent, dollar holdings would decline to from 60 percent to less than 35 percent as holdings of other counties’ currencies, such as the British pound, Japanese yen and the Canadian dollar total more than ten percent.

Tett also noted that it’s ironic that the dollar against a trade-weighted basket of currencies is little changed since 2008. Of course it’s little changed. The dollar is weighed against currencies that are undergoing their own debasements. In the EU, Mario Draghi, European Central Bank president, says that the “door is open” for further easing. Japan is printing and spending to achieve two percent inflation. The British have record low interest rates. The dollar is the best-looking horse in the glue factory.

For the dollar to remain the dominant world reserve currency, the US will have to get its financial house in order, which means balancing its budget, something that has been more of an accident than a plan for the last 100 years. billion a month range. )

Further, in the world of commerce, the US trade deficit would have to decline. (In December, the US trade deficit increased to $38.7 billion from $34.6 billion in November. As can be seen by looking at the graph, the deficit is trending up and holding steady in the $40

Balancing the budget would mean cutting back on welfare spending and the military, neither of which is going to happen in the near future. Which means continued deficit spending, money creation and further weakness in the dollar. In this climate, the renminbi can rise to compete with the dollar as the world’s primary reserve currency.

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